Roth Estate Planning Strategies

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Roth IRA and Roth 401k Accounts and Roth Estate Planning Strategies

There are trade-offs when deciding whether to allocate contributions to Roth retirement savings accounts versus traditional retirement savings accounts that have deferred income taxation features. In the majority of personal finance situations, making 100% of allowable contributions to Roth retirement plans would probably not yield the greatest total wealth in retirement compared to making contributions to traditional retirement savings accounts — even after income taxes on distributions from traditional retirement accounts during retirement are considered.

When the lifetime net present value of Roth contributions is compared to the lifetime value of making currently tax deductible contributions into traditional IRA and employer sponsored defined contribution retirement plans, such as 401k, 403b, KEOGH, and other plan accounts, most often traditional retirement accounts yield higher lifetime wealth net of taxes versus Roth accounts. Reducing current taxation with traditional accounts is usually a better bet than eliminating future taxation with Roth accounts.

However, a Roth retirement account contribution strategy also provides estate planning benefits that traditional tax-advantaged retirement accounts do not. Sometimes these estate planning benefits can tip the balance toward making Roth account contributions. When you expand your total present value analysis to include the long-term value to a multi-generational family, then Roth assets can have significantly greater value for some people.

If Roth assets remain at death, there are very significant long-term multi-generational tax avoidance advantages. In such circumstances where it is likely that a person’s assets will be adequate to cover retirement expenses even with a very long life, then it can be advantageous first to live off of traditional retirement plan assets, which are subject to mandatory withdrawals and associated income taxation in retirement anyway. This means that over one’s lifespan, when retirement assets are adequate for the long-term, then a larger and increasing proportion of one’s future financial asset portfolio would consist of Roth assets.

Why Roth retirement accounts can have some very significant advantages over traditional tax-advantaged retirement accounts for estate planning purposes

If a family’s financial model indicates that there is a strong possibility that they will still have tax-advantaged account assets at death, then those assets should be Roth tax-advantaged account assets, where feasible. Roth assets can be inherited by children, for example, and those inherited Roth assets can also grow tax-free over the expected lifespan of the person inheriting the Roth account. Heirs have certain mandatory withdrawal requirements related to their expected lifespans, but those withdrawals do not trigger income taxation on any Roth account asset appreciation either during the life of their benefactor or during their life as the heir.

For example, this means that the middle-aged offspring inheriting Roth retirement account assets from an elderly senior citizen parent when that child is age 50 perhaps, could enjoy possibly another 40 years of tax-free Roth inherited account investment growth with an income stream along the way. Under US tax law, this middle aged child would be required to make mandatory annual withdrawals related to his or her life expectancy. Nevertheless, these inherited Roth account withdrawals would be non-taxable including any asset appreciation that may have occurred during the life of the parent or the life of the child.

Only when these withdrawn inherited Roth account assets have been reinvested into a taxable account AND those reinvested and now potentially taxable assets have later appreciated in that taxable account, would only this subsequent asset appreciation potentially be subject to either short-term capital gains taxes or to long-term capital gains taxes. Depending upon the tax-efficiency of subsequent investments within this taxable account, recognition of taxes on asset appreciation could be deferred for a very long time.

Therefore, if you are among the minority of US citizens who can reasonably expect to exit this life with substantial tax-advantaged account assets, then let them be Roth account assets, if possible. Inherited traditional tax-advantaged retirement accounts do not provide these very significant and valuable estate planning tax avoidance benefits provided by inherited Roth accounts.

The only thing one needs to overcome is the current payment of higher income taxes on Roth account contributions or traditional retirement account conversions to Roth accounts. You need to possess available cash to pay the taxes, and to have the confidence that your future asset accumulation will be substantial enough to justify paying more taxes now for even greater tax savings in the future on a net present value basis. And, your kids could be quite happy with what your leave behind for them in the form of inherited Roth accounts.

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Roth retirement plan account rules are in flux

Prior to 2010, total income restrictions limited Roth account contributions to those of low to moderate earned income. This changed in 2010 as all income restrictions on Roth account contributions and Roth account conversions were eliminated. Whether income limits on Roth account contributions will be re-instituted in the future is obviously unknowable currently. But in the interim, those who want to make Roth contributions and do Roth conversions have a potential opportunity to improve their long-term wealth.

You should use a capable retirement investment calculator to better understand the potential size of your projected Roth retirement nest egg assets in the future and the trade-offs between Roth and traditional account contributions. You should find out whether you could be one of the minority of the US taxpaying population that could amass significant enough retirement assets to have a preference of holding Roth retirement account assets rather than traditional retirement plan assets. Do not just guess, because too much money is involved in the decision.

Incidentally, to figure out whether you are one of the minority with a reasonable chance of building substantial retirement assets, you need sophisticated home retirement planning software that can help you to figure this out for your particular financial situation and circumstances. We can help, because we offer the bargain-priced VeriPlan lifetime retirement planning tool spreadsheet application that makes figuring this out for you family straightforward. To learn more, just explore the various pull-down menus that you will find on the blue menu bar near the top of this page.

This retirement planning spreadsheet software fully automates Roth account versus traditional tax-advantaged account retirement planning calculator analysis capabilities. It provides integrated Roth IRA retirement calculator, 401k retirement calculator, and other retirement plan calculator projection capabilities that take into account your particular current and projected lifetime financial planning situation. You can use VeriPlan’s flexible retirement planning tools to evaluate the net lifetime value to your family of choosing any combination of allowable Roth and/or traditional retirement account contributions over your lifetime. These retirement tax calculator features are just a few parts of VeriPlan’s rich set of lifetime financial planning and retirement planning software capabilities.

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Also, see these Roth investment calculator articles:
Roth IRA Conversion Calculator
Evaluating Roth IRA Conversions
Roth IRA Calculators


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The personal financial planning strategy postings on this free website give individuals and families important ideas about lifetime financial planning issues. Our publications help to clarify important topics associated with establishing better personal finance practices. In addition, to analyze your retirement planning alternatives, you should use the best retirement calculator tool with superior retirement investment projection capabilities. You can find that retirement calculator right here. Its name is VeriPlan. VeriPlan is an excellent all-in-one financial planning tool with early retirement calculator analysis capabilities and the best retirement investment software features available for your do-it-yourself lifetime financial planning needs.

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